According to recent news, Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) is on the market and the street is speculating on potential buyers. There is a strong possibility that Celgene Corporation (NASDAQ:CELG) can target Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX)’s Kyprolis to ensure its complete domination of the blood cancer treatment market. Any developments in this regard will positively impact its valuation. Even if it doesn’t acquire Kyprolis, Celgene is still a buy due to the high growth potential of its Revlimid franchise.
Business model
Celgene Corporation (NASDAQ:CELG) is a biotechnology company involved in discovering, developing and commercializing treatments for cancer and ‘immune inflammatory’ diseases. It most famous drug is REVLIMID for the treatment of myeloma and transfusion-dependent anemia. Other known drugs include VIDAZA, ABRAXANE, THALOMID, POMALYST and ISTODAX.
The company has a vast pipeline that contains approximately 27 different compounds divided into 9 treatment areas. These compounds are already available in the market as approved drugs or are still undergoing multiple clinical trials. The company is working to expand its Revlimid franchise and expand its pipeline into multiple treatment areas. It has adopted the strategy of partnering with small development companies that have promising candidates in pre-clinical/ early stages.
Fundamentals
Despite tough competition from Healthcare giants, Revlimid has been exceeding analyst expectations. The street was expecting Celgene to post an EPS of $1.35, but it beat expectations by posting EPS of $1.37 per share. This is the fourth quarter in a row that Celgene Corporation (NASDAQ:CELG) has exceeded expectations. The revenue was also impressive at $1.5 billion, marking a 15% improvement year over year. Net income came in at $592 million, a 22% year-over-year improvement.
The company has also revised expectations for 2013. It now expects EPS in the range of $5.55 to $5.65 on revenue of $6 billion. The street expects Celgene to post revenue of $6.16 billion and earnings of $5.74 per share. Revlimid is the key factor behind the stellar financial performance of Celgene; it contributes approximately $3.8 billion to sales. The second highest selling drug is Vidaza at approximately $820 million.
Pipeline news
Celgene Corporation (NASDAQ:CELG) has one of the richest pipelines in the entire biotechnology sector. The company is still working to further improve its pipeline by making partnerships with small biotechnology companies. This year the biggest news for Celgene investors was the FDA approval of Pomalyst. The FDA has approved Pomalyst for treating cancer patients which have shown resistance to other cancer treatments. The drug is in the same class as Revlimid, but unlike Celgene’s star drug it is able to treat patients that don’t show response to the first-line treatments. The company expects that the peak sales potential of Pomalyst can reach $1 billion. Revlimid and Pomalyst both face competition from Onyx Pharmaceuticals Kyprolis. Luckily for Celgene, it is currently only approved as a third-line treatment. However, there are reports that it is increasingly being used off-label as a second-line prescription. The company is also pursuing trials to get FDA approval for Kyprolis as a second-line drug.
Celgene has also acquired the cancer treatment MOR202 from MorphoSys. The company will develop the drug to treat leukemia and myeloma. According to analysts, the myeloma market is enormous, and there are approximately 27,000 new cases diagnosed every year.
Celgene Corporation (NASDAQ:CELG) is also investing in regenerative medicines under its cellular therapy units. It has signed a deal with Tengion to invest $15 million for first rights on its kidney tissue regeneration technology. Tengion has acquired $33.6 million in funding for Neo-Kidney Augment product candidate.
Chronic kidney disease is one of the most common medical issues around the world and more than 25 million Americans suffer from the disease. The disease is common amongst people who have diabetes or cardiovascular issues. Long-term treatment with antibiotics is also a common cause of chronic kidney disease. If successful, this treatment will allow cell tissues to be created from the kidney and reduce the need for painful processes such as dialysis or transplant.
Competition
A Couple of weeks back, Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) announced that it has rejected an acquisition bid from Amgen. The stock appreciated approximately 50% and speculation started on other prospective buyers for the company. The most commonly taken names are Bayer and off course Amgen. The street is missing the high synergy that could exist between Celgene and Onyx. It is true that Celgene is not as cash rich as Bayer or Amgen, but any form of a merger could be beneficial to shareholders of both companies.
Celgene Corporation (NASDAQ:CELG) is already an established player in the blood cancer market with its products Pomalyst, Revlimid and Thalomid. With Onyx proteasome inhibitor, Kyprolis, the two companies combined will totally dominate the blood cancer market. Celgene is already trying to diversify its blood cancer portfolio with purchase of Avila Therapeutics and investments with Morphosys. If any rumors or actual news breaks in this regard, valuations of both companies could soar.
Valuation
Celgene has appreciated approximately 65% YTD on approval of Pomalyst and sales growth of Revlimid. The company is trading at a forward P/E of 19, which is way below the industry average of 35. Using industry average P/E and consensus estimates, my Celgene price targets are as follows. The industry average P/E might seem to over state the price target considering it includes a lot of very small biotechnology companies with very high P/Es; however, the consensus EPS estimates also underestimate the true sales potential of Revlimid and Pomalyst. The high P/E also takes into account the synergy in the event it acquires Kyprolis.
| Celgene Target Price | ||||
|---|---|---|---|---|
| Year End | EPS est | P/E | Target Price | Upside |
| 2013 | $5.73 | 35 | $200 | 33% |
| 2014 | $6.93 | 35 | $242 | 45% |
Bottom line
Celgene Corporation (NASDAQ:CELG) has one of the strongest oncology pipelines in the entire healthcare sector. The company has a dominating position in the blood cancer treatment market and is looking to further consolidate this dominance with strategic acquisitions. It is highly likely that Celgene will be interested in acquiring Onyx Pharmaceuticals and offering a comprehensive blood cancer portfolio. Any development in this regard will result in immediate price appreciation for both companies. Therefore, Celgene is a solid investment due to its high earnings visibility and immense upside potential.
The article Can This Biotech Go Even Higher? originally appeared on Fool.com and is written by Mohsin Saeed.
Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Celgene. Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
